Joan Burton (Dublin West, Labour) | Oireachtas source

I thank the committee for the opportunity afforded to me to discuss policy issues in respect of the revised eligibility criteria relating to the contributory State pension, including averaging the number of PRSI contributions over the years. As requested, my opening statement will be brief.

The State pension is a key social welfare payment. It is the fundamental basis for the pension system and is a very valuable benefit. There have been a number of changes introduced to the State pension in recent years, including those relating to the State pension age, the abolition of State pension transition, an increase in the number of payment rate bands and an increase in the total number of paid PRSI contributions required to qualify for a State pension. There is a strong policy basis to these changes. They are underpinned by demographic changes and subsequent issues around the sustainability of pensions. Happily, more people are living to pension age. When they do so, they live for much longer. In that context, I wish to inform the committee that the ratio of the working age population to pensioners will decrease from 5.3 at present to 2.3 by 2050 and that the number of older people will increase from 12% of the population over 65 in 2012 to an estimated 23% in 2050. In addition, in the mid-1990s - which all of those present will remember - life expectancy for males was 73 and for females 78.5. Now, for those aged 65 life expectancy is approximately 82 years for men and 85 for women. Happily, people are living for an extra ten to 12 years and we are making payments for this extended period. By 2030, which is not that distant, the figures for life expectancy for men and women will have risen to 84.1 and 87.4, respectively.

The State must ensure that it can continue to sustain pension payments in the future. This means that people will be obliged to participate in the workforce for longer and that they will need to contribute more towards their pensions. This rationale forms much of the basis for the changes outlined.

The committee has indicated it wishes to discuss the averaging contribution test for the State pension. Entitlement to a State pension is based on having a minimum number of paid contributions and an average number of contributions from the time of entry into employment. The paid contributions requirement is ten years, that is 520 contributions. This changed from five years or 260 contributions in 2012 but this change was legislated for in 1997. The average yearly test of calculating contributions was introduced in 1961. It was designed to ensure that people could qualify for a pension from the outset rather than having a long lead-in time before pensions started to be paid. This was at a time when the social insurance system that was less than comprehensive.

Following a number of reports which examined these issues, it is planned to move in the future to a total contributions approach whereby payment made can be linked to contributions over a working life. This is because the social insurance system is now more comprehensive. We have the existence of voluntary contributions, the homemaker's scheme and the facility for awarding credited contributions to employees in times of unemployment or illness. These all mean that unless a person goes abroad or operates in the informal economy she or he will have the potential to achieve a 100% insurance record. It should be possible to achieve a contribution record of anything from 40 to 50 years, while the age at which one starts work would have a bearing on that. This change to using a total rather than an average contributions test to determine entitlement to a State pension was also endorsed by the OECD in its recent report.

The policy changes I have outlined were flagged and agreed by previous governments in previous policy documents. The Green Paper in 2007, which was published during a boom period in the Irish economy, and the National Pensions Framework in March 2010 outlined the need to increase the pension age and the need for a stronger link between social insurance contributions paid and pension received. Given that the then Government accepted the recommendations of those papers, they were broadly incorporated into the documents agreed with the IMF when its officials came to Ireland in November 2010, as the members might expect. The OECD undertook an independent and objective Review of the Irish Pensions System, which was published in April this year. In it, the OECD make a number of key comments. It notes the significant challenge of funding additional pension spending as a result of population ageing, a point to which I will return. It also makes a number of favourable comments; the economic situation of pensioners in Ireland is comparatively good, both with respect to other age groups in the population and in international comparison. Finally, it states that Ireland also faces considerable short-term challenges due to the continuing impact, as we know, of the financial and economic crisis.

With regard to the timing of these changes, I want to put pension spending into a budgetary context. The biggest single block of expenditure in the Department of Social Protection is expenditure on pensions, whichwill amount to €6.5 billion, or 32% of overall expenditure, as provided for in the Estimate for this year. The reality of the demographic change is happening now. It is increasing the Department's spending on older people year on year, in 2013, in earlier years and next year. I want to make it clear that without as it were getting any compensation for this I had to find an extra €190 million approximately each year for the increase in the number of pensioners and their happy extra longevity. It is important to understand that the Department of Social Protection has done all of that within the Estimate without getting any extra specific money as a consequence. When people talk about savings we have to make and so on, this is also a cost we happily carry.

The Department has been expected to play its part in achieving the overall goal of Government to put Government finances on a sustainable footing for the years ahead. We have also had to adhere to troika commitments, which hopefully we will be exiting towards the end of this year but then we will be subject to the two-pack and the six-pack regulations, Commissioner Rehn's overall financial surveillance.

Achieving reductions in welfare expenditure has been and continues to be a considerable challenge. Reducing overall expenditure while protecting the most vulnerable people in society is extremely difficult. The State pension continues to protect those with the lowest incomes. I have been speaking about the contributory pension but we also have the fallback position, which is important in Ireland, of the non-contributory pension for people who lack means or who for a variety of reasons might never have been contributors. That is a strong feature. We have been able to maintain and continue that. It is a tribute to all the political parties in Ireland and to those on the Independent benches that, collectively, we have all prioritised the contributory and the non-contributory core pension.

The Actuarial Review of the Social Insurance Fund, which was published in September last year and given at the beginning of that month to the social affairs committee, shows that social insurance offers excellent value of money for those on the lower part of the income distribution, those with shorter contributions histories, and particularly the self-employed. One would find it very difficult to get a good pension on the commercial market compared to a social welfare pension for 4% for what used to be initially three years, then became five years and is going up to ten years. It is the best value around. The social solidarity principle which underlies the fund is reflected in the fact that for those at the higher end of the income distribution, the fund is redistributive and they generally get back less than they pay in. Notwithstanding the recent changes over the last number of years, those with lower earnings, those with shorter contribution histories and the self-employed will continue to obtain the best value for money from the fund.

I have sought to maintain the basic rate of State pension at 34% of the average weekly earnings. There have been significant improvements with regard to the level of pensioner poverty in Ireland in recent years. This is mainly attributable to substantial increases in the rates of State pensions over the period. In 2004, which was not a bad year in that the Celtic tiger was growing, the at-risk of poverty rate for people aged 65 or over was 27.1% higher than for other age groups and higher than the rate for the total population which then was 19.4%. By 2011, the at-risk of poverty rate for those aged 65 or over had dropped because of increases in pension payments to 9.7% while the rate for the population as a whole was at 16%. In 2011, the consistent poverty rate for those over the age of 65 was 1.9% compared to 6.9% for the population as a whole. This compares to 3.9% in 2004 when the rate for the population as a whole stood at 6.6%. That is a tribute to all the political parties and Members of the Oireachtas past and present, and the fact we have been able to continue to prioritise this particularly significant area of expenditure.

While expectations have changed as a result of the changes, it should be noted that all the short-term social welfare schemes are payable to the age of 66. I hope that this overview, particularly of the demographics and the fact that we are spending approximately €190 million a year extra due to the way the population figures are changing, has been helpful to the members.